After a week of turmoil on global markets, economists are divided on the chance of a domestic rate cut over the next few months.
Concerns about the likely impact of a Greek debt default on the euro zone prompted the usually hawkish European Central Bank (ECB) to unexpectedly cut its benchmark rate on Thursday, by 0.25 percentage points to 1.25 percent, after hiking by the same amount in both April and July. New ECB president Mario Draghi warned the euro zone would be in a “mild recession” by the end of the year.
Ian Cruickshanks, the head of strategic research at Nedbank Capital, said key rates in the domestic market dropped 15 basis points on the news and were currently signalling a 65 percent chance of a cut in South Africa’s official repo rate by January.
Brait economist Colen Garrow expects the Reserve Bank monetary policy committee (MPC) to move sooner, cutting by a half percentage point when it meets on Thursday.
The repo rate, at 5.5 percent, is at its lowest level since October 1980 – down from a peak of 12 percent in December 2008.
Earlier in the year, the next move was expected to be up but euro zone turmoil and a stalled global recovery has changed the growth outlook and rate expectations. “Forget inflation. This crisis is about growth, or rather the lack of it,” Garrow said on Friday.
Gross domestic product (GDP) rose by only 1.2 percent in the second quarter and a similar number is expected for the third quarter. The figures are quarterly changes, adjusted for inflation and seasonal factors and multiplied by four to show an annual trend.
However, inflation is expected to breach the ceiling of the 3 percent to 6 percent target range by the end of the year and a weak rand could keep it above that level. Traditionally that would make it unlikely that the central bank would cut its benchmark rate.
But these are unusual times. Commenting on the ECB decision, Stanlib economist Kevin Lings noted that inflation in the euro zone had been above the ECB target rate of 2 percent since December last year and was currently at 3 percent.
He said the ECB “clearly responded to the worsening economic conditions and the increased risk that the euro area lapses back into recession”.
Australia’s Reserve Bank also cut its rate last week, by a quarter of a percentage point to 4.5 percent, saying inflation was likely to fall.
And US Federal Reserve chairman Ben Bernanke signalled willingness to provide more monetary stimulus to keep the US economy growing.
That spells future dollar weakness, which would provide support for the rand. The currency was steadier last week, with the exchange rate at R7.9002 to the dollar at Friday’s close. However, most economists remain cautious about calling a cut in the repo rate.
Elna Moolman, the chief South Africa economist at Renaissance Capital, saw only a 35 percent chance of a rate cut this week. She said the next move would be up – but “late next year at the soonest”.
Annabel Bishop, Investec’s group economist, said the rate was likely to remain steady for the whole of next year. Lings had a similar view. But both said a cut could happen if growth continued to disappoint. - Ethel Hazelhurst